Renewables a Safe Haven in Sick Economy

April 1, 2020

Oil and gas are crashing, could soon be below zero. Smart money is looking for a safe harbor in the Corona virus storm.
That would be renewable energy.

Wall Street Journal:

Wind and solar farms are attracting interest from investors hungry for low-risk, stable-yield opportunities at a time of extraordinary market volatility.

That interest is a boon for renewable projects, and could give them a financial boost in coming months and years. However, developers could face challenges in getting additional new projects financed and built amid the turmoil created by the new coronavirus.

It might seem an odd time for a renewable-energy uptick, given the economic slowdown and a historic crash in oil prices that is making fossil fuels cheap. But wind and solar farms experienced a similar surge after the 2008 financial crisis, when investors seized on the projects as safe-harbor investments with yields in the mid-single-digit percentages.

Wind and solar farms have contracts to sell their electrical output to utilities and companies with good credit ratings for a decade or longer, making their returns stable and relatively low risk.

“There is certainly some increased interest and discussion around uncorrelated yields, and renewables falls into that category,” said David Giordano, global head of renewable power atBlackRock Inc. BLK -3.38%“As I’m trying to stock my cupboard with canned goods, we have an awful lot of calls happening.”

The increased interest is fortuitous for renewable-energy builders such as Kevin Smith, chief executive of the Americas at Lightsource BP, a solar developer half-owned by British oil giant BP PLC. On March 12, he signed a deal with banks to finance a $250 million solar project in North Texas, even as the Dow Jones Industrial Average ended the day down 2,352 points.

“It was a strange day,” Mr. Smith said. He said he expects to close a further $750 million in solar financing this year, including a large solar farm in Colorado. “I’d like to think that there will be more investors from infrastructure funds looking at renewable markets as a safe haven from the volatility,” he added.

Corporations contracted for 46% of the 20.2 gigawatts of renewable energy added to the U.S. grid last year, according to the Renewable Energy Buyers Alliance, a group that represents corporate purchasers. The largest buyers last year were Facebook Inc.,FB 0.51% Alphabet Inc. GOOG 1.39% unit Google and AT&T Inc.Corporations have been contracting for renewable energy because prices are low and because many have made pledges to lower their carbon output.

“No one has yet indicated that they intend to slow their purchase,” said Miranda Ballentine, the group’s CEO.

Still, finishing existing projects, much less building new ones, might prove difficult. Developers could face some significant hurdles in coming months, including shortages of labor and specialized tax-equity financing. The U.S. industry relies on tax credits. 

Renewable-energy lobbying groups are seeking relief from Congress, either in the form of cash grants instead of tax credits, or extensions to allow delayed projects to still qualify for credits. But renewable-energy projects weren’t included in the $2 trillion coronavirus stimulus bill, and it isn’t clear any assistance is forthcoming.

For now, deals are continuing. Only 4% of near-term deals have requested delays, said Bryce Smith, CEO of LevelTen Energy Inc., an online marketplace that connects buyers and sellers of renewable energy. 

“These are long-term investments,” he said. Supply contracts can last from 10 to 15 years. 

Earlier this month, the Tennessee Valley Authority solicited proposals to build 200 megawatts of wind or solar power. It said it expects to sign a contract with the winning bidder in September.

“If you have a project in the chute, and you are working toward a closing in the next week or month, or months, my guess is that those projects get done,” said Paul Gaynor, CEO of Longroad Energy, a Boston-based renewable developer. “For projects that are expecting to enter the finance market in the second half of 2020, I think it’s a total toss-up right now if it gets done.”

Meanwhile, burgeoning glut of oil, due to crashing demand and Saudi/Russian price war, could crash price of oil below zero.

CNN:

Highways are empty. Planes are grounded. Factories are dark. The unprecedented collapse in oil demand has sent crude crashing to 18-year lows. 

Supply, on the other hand, remains largely resilient amid a price war between Saudi Arabia and Russia. US producers don’t want to be the first to blink by turning off production. 

That could mean a supply glut so epic that the world will soon run out of room to store all the unneeded barrels of oil.

“The market is starting to signal that not only is there no demand for this crude, eventually there could be nowhere for it to go,” said Jeff Wyll, senior energy analyst at Neuberger Berman. 

In other words, storage facilities, refineries, terminals, ships and pipelines eventually could reach capacity — something that hasn’t happened since 1998, according to Goldman Sachs.

Distressed pricing in some corners of the oil market shows that investors are starting to price in the risk that might occur soon. Although headline oil prices such as West Texas Intermediate and Brent are trading north of $20 a barrel, some regional prices have recently plunged into single-digit territory.

That is especially true for landlocked grades of crude where access to storage is even trickier. “Demand is falling so fast relative to supply that very soon many producers’ main issue is not going to be whether they can ensure operating profit but rather if they can find an outlet for their crude,” analysts at JBC Energy wrote in a report Tuesday. 

One storage option: loading all that extra crude onto ships. JBC said about 20% of the global fleet of very large crude carriers (VLCCs) could become floating storage. But even that would not absorb the surplus. In April, some 6 million barrels per day of “homeless crude” might literally have nowhere to go, JBC said, a figure that would rise to 7 million barrels per day in May.

5 Responses to “Renewables a Safe Haven in Sick Economy”

  1. rhymeswithgoalie Says:

    Tangent from rasmus on Real Climate:

    Last week, a colleague shared a tweet with a link to a very unusual paper. I first thought it must be a joke, but then realised that since it was the last days in March when I read it, it could not be an April’s fool joke. It seems to be a serious paper.

    So I thought it would be perfect to share the reference McCarthy et al. (2020) today. The paper has a few useful take-home messages, such as the C.R.A.P. framework.
    _____
    References

    I.P. McCarthy, D. Hannah, L.F. Pitt, and J.M. McCarthy, “Confronting indifference toward truth: Dealing with workplace bullshit”, Business Horizons, 2020. http://dx.doi.org/10.1016/j.bushor.2020.01.001

  2. rhymeswithgoalie Says:

    Can’t people just dump crude on rivers, lakes and shorelines? They’ve had plenty of experience.

  3. Canman Says:

    Here’s a great opposing view:

    https://www.city-journal.org/coronavirus-american-shale-industry

    I find this bit particularly interesting and 180 degrees away from what I usually hear:

    … Hundreds of startups are developing oil-field software. Major players in digital domains—including Microsoft, Google, and Amazon—all have “big oil” programs. …

    • rhymeswithgoalie Says:

      Crikey! The Manhattan Institute has been praised by Giuliani, Peggy Noonan and William Bennett. They’re big on Broken Windows policing (as opposed to Community Policing).

      I didn’t know they existed, and now I wish I still didn’t.

      • dumboldguy Says:

        You haven’t missed much by not knowing about The Manhattan Institute. Although they are heads and shoulders above Heartland, they are just another voice for the greedy rich and the corporations.


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